Call 2017 the year Costco (NASDAQ: COST) removed any doubts that it could survive and thrive in the current retail environment. The chain showed that it can keep adding members and sales while adjusting its business model to meet changing customer demands.
The warehouse club saw same-store sales rise by 4.1% globally in its fiscal 2017, a period that saw digital sales climb by 13%. It followed that by posting a 10.5% increase in same-store sales and growing digital sales by 43% in Q1 2018. It did that while slowly growing its store count and continuing to add members. In addition, the company successfully raised its membership prices without seeing any negative consequences.
Costco turned a digital corner
For a long time, the membership-based warehouse club more or less ignored the internet. That has slowly changed over the last few years, and the company's digital evolution took hold in 2017.
On a practical level, the company invested heavily in making its website easier to use and improving its back-end logistics. This involved making it possible for visitors to make purchases in fewer steps. In addition, the company reworked its supply lines to allow for faster fulfillment of online orders.
In October Costco launched two grocery delivery businesses. The first offers free two-day delivery on orders of non-perishable items over $75. The total box can weigh up to 40 pounds, and about 500 products are included in the offer.
The second and frankly more interesting delivery model is the chain's partnership with Instacart. This is a same-day one or two-hour delivery service, which CFO Richard Galanti explained during the Q1 earnings call:
"This is currently offered at 376 of our U.S. locations, and there will be a number of additional U.S. locations planned between now and the end of calendar '18 as our partnership expands," Galanti said. "There are approximately 1,700 SKUs, both dry and fresh that are offered and can be fulfilled."
Membership and renewals look good
While comparable-store sales and digital growth are important, the key metric for Costco is membership growth. The chain hovered around its standard 90% renewal rate all year. It also saw total households with memberships climb from 49.4 million at the end of Q4 to 49.9 million at the close of Q1. The company also saw total cardholders rise from 90.3 million to 91.5 million over the same period.
Those increases are in line with the numbers it put up during the previous three quarters. That's in line with the chain's slow and steady growth approach, where it adds about 25 new locations each year, a strategy it plans to continue in 2018.
What's next for Costco?
Because of its membership model, Costco does not have to be a first mover -- it proved that with digital and delivery. The company can afford to sit back and let other companies experiment. Then, when a trend takes hold, it can make its move and enter the space.
That works because the warehouse club's members join partly for the value proposition and partly because it's fun to shop in its stores. Adding online and delivery options enhances the value of the membership, but they do not change the core reason most people join.
Costco had a very strong 2017 despite the challenges faced by the retail sector overall. There's no reason to believe that the company won't continue to deliver strong sales and membership numbers in the year ahead.
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Daniel B. Kline has no position in any of the stocks mentioned. His father-in-law works for Costco in the hearing aid department. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.